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Is Changing from PI to IO advisable?

Discussion in 'Property Finance' started by Lyon, 11th Sep, 2015.

  1. Lyon

    Lyon New Member

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    Hi All,
    This is my first post but have been browsing here for a while. I read from the other threads how banks are increasing their IO rates and favouring PI loans due to regulatory requirements.
    We have 2 IPs that are now on P&I as their IO terms expired about a year ago. We didn't seek for extension obviously hence the current P&I terms. We are now considering changing them back to IO terms for better cash flow and to make saving for the next deposit quicker. Would this be a good move considering the current environment where it appears that banks prefer P&I loans? Would like to buy another property but saving for the deposit will take longer with both these loans on P&I. IP1 has about $270k loan and was valued around $450k two years ago. Ip2 has $219k loan also valued 2 years ago at around $310k. We do not have PPOR, currently renting. Also, what would be needed to change them from P&I to IO loans? Would that mean something like going thru a new application and have to provide pay slips etc? I've read thru different posts but I'm still struggling to comprehend some notions like releasing equity etc. Would like some help on how we can move on from this situation and be able to do purchase.
    Many thanks!
     
  2. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Since you don't have a PPOR then yes.

    But never use cash for the deposits - borrow
     
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  3. D.T.

    D.T. Adelaide Property Manager Business Member

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    IO is still better than P&I even if the rate is slightly more. That's a lot of extra capital each month you're throwing away that you could be putting towards your own home.

    If the values haven't been updated in a couple of years, maybe you have some usable equity there to play with?
     
  4. montoya

    montoya Well-Known Member

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    Sorry I can't answer your question Lyon, but am following this thread with interest as we are in a similar position, and pre-APRA thought it was a no brainer (for the same reasons you mentioned), but am keen to hear from members of the forum that are brokers that would know whether the cons outweigh the pros.
     
  5. montoya

    montoya Well-Known Member

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    @D.T. What if you don't have any non-deductible debt though? (No intention to purchase PPOR in the next 2-5 years) Would it not be better to pay down the principal to pay less interest? Afterall, any repayment in the principal = greater equity. Equity can be accessed at a later stage (split the loans to not contaminate the loan portion that is deductible in the case the funds are used for non investment purposes)

    (It's way past my bedtime so apologies if the wording is clunky)
     
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  6. D.T.

    D.T. Adelaide Property Manager Business Member

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    In that case yes, I'd make one P&I and all remaining IPs as IO to focus on one property at a time.

    However - it's best to not get your self into a position where you're reliant on redraw or topup if emergencies come up. Keep some cash aside as a buffer! Staying IO helps with this a lot, depending on your income / lifestyle.
     
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  7. Jess Peletier

    Jess Peletier Mortgage Broker - Australia Wide Business Member

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    Releasing equity = borrowing more from the bank against the increased value of your property. For eg, IP1 is valued @ $450k, and it's loan is $270k. The bank will let you increase your loan up to 80% of the value of the property, so a max loan of $360k. This means you can get a $90k loan and use it as deposit for your next property. (450*0.8=360, - 270= 90).
    It would be a good idea to get a broker to do a few valuations for you and see how much the various banks will lend you. Definitely use equity to purchase your IP's and save your cash to either buy or offset when you buy a PPOR.
     
  8. Lyon

    Lyon New Member

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    Thanks Terry! i do need to get my head clearer on the concept of borrowing for the deposit.
     
  9. Lyon

    Lyon New Member

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    That makes it clear, thanks Jess. I have another silly question, would getting a broker do those valuations mean getting hits on the credit file? It seems that it should'nt. I guess my question is, could a broker get say 3 different banks to value the same property without actually lodging a loan application with any of the banks? The valuations we previously had were done by the bank where we have the home loans with and that's because the loan package we have, came with 1 free valuation after a few years or something.
     
  10. Redom

    Redom Mortgage Broker Business Member

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    Yes, you can order multiple valuations from different banks. Would make sense to choose lenders that are suitable, as lenders usually only accept their own valuation.

    Can also mix valuation types (desktop, kerbside and full).
     
  11. Jess Peletier

    Jess Peletier Mortgage Broker - Australia Wide Business Member

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    Valuations don't hit the credit file. When it comes to refinances for equity release, I usually get valuations from a few lenders - desktops are great if you're under 80%, and can be very generous in some situations.
     
  12. miked

    miked Well-Known Member

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    For the practical side of your question, we just changed from P&I to IO - it was just a form to fill in, as well as a brief email from mortgage broker saying we weren't doing it for cashflow reasons.
     
  13. Redom

    Redom Mortgage Broker Business Member

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    Works with some banks, doesn't with others - who may require a full reassessment for this.
     
  14. miked

    miked Well-Known Member

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    Now you mention it, I had to also answer a few questions (why we're doing it, plans for the future, etc), and I think there was probably some stuff going on at the bank in the background for their assessment of whether we were suitable. Was all very simple though.